How to Invest in Silver: 4 Best Ways for Investing in Silver

How to Invest in SilverYesterday, I addressed the various options investors have when looking at getting into gold. Today, I’m going to cover how to invest in silver and some examples of the multiple options available to those considering investing in silver.

Why Invest in Silver?

In my previous article “Why This Silver Price Outlook for 2015 Might Surprise Investors,” I discussed the poor performance of silver prices. In 2011, silver prices peaked at $49.82 an ounce; the metal now trades at roughly 70% below that level. When an investment falls out of favor with the majority, it’s most often the right time to begin doing your due diligence. In this case, that would include researching how to invest in silver.

This article will focus on several alternatives investors can use to get exposure to silver. After all, there are a lot of different ways to invest in precious metals. While the price of silver is important, how you choose to invest in it can significantly impact your returns.

1. Silver Coins and Futures Contracts

One of the surest and long-standing ways to invest in silver is through buying silver coins from the U.S. Mint. Available for purchase from the Mint or through a dealer, silver coins are accessible, but the hassle of transport and costs of storing it don’t make it the simplest option.

For the adventurous with cash to spare, silver is also traded on the commodity futures market, or COMEX, which is operated by the CME Group of Chicago. The large contract size—5,000 troy ounces—makes small changes in price equate to substantial gains or losses. As a result, brokers require traders of this metal to maintain significant account balances in case there are large price swings. Margin requirements make this alternative too onerous for many individual investors.

2. Silver Exchange-Traded Funds (ETFs)

Investors searching for easier ways to invest in silver can use exchange-traded funds (ETFs) to their advantage. Similar to mutual funds, ETFs provide investors with the opportunity to have ownership in a themed portfolio of stocks, passive funds that follow an index, or, as in this case, exposure to a precious metal like silver (silver bullion or precious metals mining companies).

The most popular physical silver ETFs include iShares Silver Trust (NYSEArca/SLV) and ETFS Physical Silver (NYSEArca/SIVR). Both of these ETFs are heavily traded. Higher trading volume is important, as greater volumes help buyers and sellers receive a fair price while limiting wild price swings due to a lack of a competitive bidding process.

Investors can also look at ETFs that track the performance of silver miners. One name that’s well-known in the silver mining ETF area is the Global X Silver Miners ETF (NYSEArca/SIL).

3. Silver Stocks: Producers and Royalty Companies

When looking at silver stocks, it is critical to look for low-cost producers with plenty of cash on hand to weather downturns. Also important is the location of mines, the amount of silver reserves, and production growth.

Two big names that match the quality characteristics mentioned above that are worth watching are Pan American Silver Corp. (NASDAQ/PAAS) and First Majestic Silver Corp. (NYSE/AG).

With silver currently trading near $16.00 an ounce, there is significant pressure on miners to stay operational. It costs a large silver miner like Pan American Silver $17.18 to produce an ounce of silver—while that’s above the spot price, it does maintain a buffer with cash equivalents of $330 million. (Source: “BMO Global Metals & Mining Conference,” Pan American Silver Corp. web site, February 23, 2015.)

A smaller silver miner like First Majestic has a total cost per ounce of more than $17.00 and reserve amounts that are roughly three times smaller than Pan American. These two companies are indicative of an industry scrambling to cut costs.

Moreover, smaller players in the silver space are highly levered to the price of silver. In fact, for a $1.00 move in the price of silver, First Majestic’ stock, on average, will move $1.64! (Source: First Majestic Silver Corp. web site, last accessed March 20, 2015.)

If you are looking to explore a more tame investment in silver, then a silver royalty company may be something to consider.

One that shines is Silver Wheaton Corp. (NYSE/SLW). It exchanges an upfront fee for the right to purchase production from miners at a fixed cost. While the company has no managerial control, which poses some risks, it is able to lock in bargain prices for silver, coming in at $4.59 an ounce in 2014. (Source: Silver Wheaton Corp., January 2015.) This business model has allowed the company to stay profitable and pay dividends throughout the downturn.

4. Top Silver Investment: Silver Streaming Companies

If you want big returns when the price of silver moves to the upside, silver mining and royalties companies—often referred to as silver streaming companies—would be your best bet. But keep in mind that there are a limited amount of silver mining companies compared to the number of gold miners out there.

A rough estimate is that only 12% of precious metals corporations listed on major U.S. exchanges are primarily focused on silver. The small number of silver pure-plays is largely due to the fact that a majority of the silver produced globally comes as a byproduct of mining other metals.

Less is more in this case; fewer options can keep investors focused. Before moving forward, it’s useful to point out that the tendency for silver prices and silver stocks to move in tandem is very high. However, by digging deeper, it is possible to find quality stocks that retain superior characteristics to the metal. The chart below simply compares the price of silver to one of the biggest players in the industry, Silver Wheaton Corp., a silver streaming company.

Silver Wheaton Corporation Chart

Chart courtesy of www.StockCharts.com

Whether you are more interested in miners or precious metal royalty companies always do your homework. Looking for quality names with strong financials and low cost operating structures when considering how to buy silver is a critical first step. For those willing to do their due diligence, silver stocks are likely to be the most rewarding investment alternative in the silver space.